Raising rival's costs in the securities settlement industry

Abstract

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Out of sight, out of mind? On the risk of sub-custodian structures

“…In addition, given the prominent role of CSDs in sub-custodian chains (see Table 1), we also study the decision to delegate the safe-keeping duties to a central securities depository in the first place rather than a custodian bank. Given the significant scale effects (Schmiedel et al (2006) and van Cayseele and Wuyts (2007)) and the potential competitive price setting of CSDs for cross-border activities suggested by Holthausen and Tapking (2004), we postulate that larger banks are less likely to rely on CSDs in their sub-custodian chains.…”

“…In this subsection, we thus examine the choice of a CSD as a first sub-custodian in greater detail. Given the significant scale effects (Schmiedel et al (2006) and van Cayseele and Wuyts (2007)) and the potential competitive price setting of CSDs for cross-border activities suggested by Holthausen and Tapking (2004), we postulate that larger banks are less likely to rely on CSDs in their sub-custodian chains. Therefore, we include a proxy for the size of the bank in order to capture potential scale and scope effects which may impact the choice of a CSD.…”

“…The existing literature on the custodian industry is very scant. It has so far focused on competitive issues between central securities depositories (CSDs) and custodians (Kauko (2007), Tapking (2007) and Holthausen and Tapking (2004)). Another strand in the literature examines the efficiency of the securities settlement industry and the potential to realize further scale economies (Schmiedel, Malkamaki, and Tarkka (2006) and van Cayseele and Wuyts (2007)).…”

Vertical Integration, Competition, and Financial Exchanges: Is There Grain in the Silo?

“…They conclude that vertical silos can prevent efficient consolidation on a horizontal level. In contrast, Holthausen andTapking (2007) andRochet (2005) model the vertical relation between custodian banks and a CSD. In Holthausen and Tapking (2007) the CSD is input provider and competitor simultaneously.…”

“…In contrast, Holthausen andTapking (2007) andRochet (2005) model the vertical relation between custodian banks and a CSD. In Holthausen and Tapking (2007) the CSD is input provider and competitor simultaneously. They show that the CSD leverages its monopoly power to compete for customers at the custodian level by raising it rivals' costs.…”